Time is too short fir wages to adjust to the price level.
-Workers may not be aware of changes in their real wages due ti inflation and have adjusted their labor supply decisions and wage demand accordingly. (if fixed contract no increase in real wages.)
Nominal wage - the amount of money received per hour, per day, or per year.
Sticky wages - this is where the nominal wage level is set according to an initial price level and does not vary.
Price level
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Wage level
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Employment level
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Implications
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Keynesian/Horizontal
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Fixed
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Fixed
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Flexible
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Dep. On change in employment.
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Intermediate
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Flexible
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Fixed
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Flexible
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Dep. On change in price level and employment.
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Classical or Vertical
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Flexible
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Fixed
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Fixed
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Dep. On change in price level.
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Long run aggregate supply (LRAS)
-Flexible price level and wage
- offset each other
Time long enough for wages to adjust to the PL
- Growth in some format
- Technological
Phillips curve represents th relationship between unemployment and inflation.
-Trade off between inflation and unemployment that only occurs in the short run.
Long run Phillips curve.
-occurs at the natural rate of unemployment represented by a vertical line.
-There is no trade off between unemployment and inflation in the long run which means that the economy produces at the full employment level.
-The long run phillips curve will only shift if the LRAS curve shifts.
Three tyoes that make up phillips unemployment,
1.Structual
2. seasonal
3. frictional
Major LRAS assumption is that more worker benefits create lower natural rates.
LRPC only shift if LRAS shift
Otherwise it is vertical or stable
Short run phillips curve
Inverse relationship between unemployment and inflation.
It has relevance to okuns law
-Since wages are sticky inflation changes, moves the points on the SRPC. If inflation persist and the expected rate of inflation rises tha the entire SRPC moves upwards due to stagflation.
-If inflation expectations drop due to new technology or economic growth then the SRPC moves downwards.
If you move/Shift curve its due to AS if its a determinate of AD it shifts along the curve.
AD- Along the curve
AS- Move along the curve
Aggregate supply shocks cause both the rate of inflation and the rate if unemployment to increase.
Supply shock --> rapid and significant increase in resource cost.
Misery index - combination of inflation and unemployment in any given year.
single digit misery =Good
The chart is very helpful in describing the the graph and what affects it. It was easy for me to differentiate between Keynesian, intermediate, and classical. I think that you should also include a graph for the Phillips curve to visually see what you are explaining. It might also be helpful to explain why cyclical unemployment is not part of what makes up Phillips natural rate of unemployment.
ReplyDeleteNice blog and notes are very helpful and detailed but expanding on the three types that make up Phillips natural of unemployment would give a better understanding for others and why single digit misery is good.
ReplyDelete